Real economic reform starts with a Banking Royal Commission

The Prime Minister Malcolm Turnbull and the Treasurer Scott Morrison have been dragged kicking and screaming by the public, the opposition and even members of their own Liberal Party / National Party coalition into having a Royal Commission into their Australian Banking “mates”.

There has been an air of pandemonium as the Banking industry and their “special friends” in politics and the media have run multiple scare campaigns and threatened the end of life as we know it … unless we back off.

“..“Australia is capital hungry, and when the capital is gone our economy has a very good chance of going into some form of economic collapse.”.

If nothing else this attempt by the Bankers to create an atmosphere of panic and fear makes the point how insane the role of private banks in our monetary system has become.

It should be nothing more than a thorough inquiry into why our banking system is so dysfunctional, bloated, greedy, powerful, sneaky, dodgy and incompetent and why the period of deregulation of Australian banking since the 1980s has produced record levels of household debt and an economy that is now hooked on using foreign debt and liabilities to speculate on the prices of houses and land rather than investing in productive industries.

What do private banks do anyway?

Listening to the Bankers this week and their political minions anyone might think that bankers hold up the sky, bring the rains, increase fertility of farm animals and sprinkle Australia with gold dust.

That is complete nonsense.

To the extent they are able to make threats and try to hold the Australian public and economy hostage it is only because they have been given an important role in our monetary system.

A role they have systematically abused time and time again.

And not for the first time either – the last time that the Bankers made a mess of things in the Great Depression there was a Royal Commission. (Click here to read about the last Royal Commission into Banking in 1937)

The obvious solution when someone has been given a privilege and abused that privilege is to take it away and that is exactly what the Royal Commission should recommend we do.

The Royal Commission should investigate the current role of the private banks in our monetary system, explain that role to the general public and show how it:

has been abused,

is dysfunctional,

is out of date

is unecessary

and then recommend that the banks lose that role and their privilege as soon as possible.

This is NOT an attack on capitalism or rank socialism it is nothing more than fixing a part of our free and democratic economic system that is BROKEN and needs reform.

This is about fixing our market economy so that it works better and is more productive and less infested with debt driven speculation. In a competitive world we simply cannot afford to stick with a model that is out of date.

There is nothing natural about the role of private banks in our monetary system. It is defective and has been tolerated for too long.

Now is the time to fix the problem.

Do we need banks for investment or to buy a home?

If there was some practical need to have “banks” to ensure that business could obtain funds for investment or for home owners to buy a home then it might be necessary to tolerate their bad behaviour (when the regulators fail to stop them).

We certainly need smart and capable organisations who can evaluate productive investment projects and issue invitations to potential investors to subscribe to those opportunities.

We also need organisations that can connect people who wish to borrow to build or buy a home with people who wish to lend money to them.

These are vital services in our economy but we sure don’t need banks to provide those investment services. Everyday private individuals, private and public companies, investment companies, insurance companies, superannuation funds are providing those services very effectively and they will continue to do so.

Companies raise funds by selling shares to shareholders or bonds to investors

Superannuation companies are making investments every day of the week to secure returns for their members retirements

Insurance companies are making investments to ensure they have enough funds available to pay when policy holders make claims

Investment companies are raising funds from investors to lend to home buyers

The banks are lazy, sloppy ineffective, greedy, incompetent mutant ‘pseudo’ investment companies that ONLY survive because of their totally inappropriate privileged role in the monetary system and their ability to ‘protect’ their income streams by pumping asset prices with an effective taxpayer guarantee.

Do we need banks to save or to spend money?

Not now.

Once upon a time, in the days before EFTPOS and Tap and Pay and electronic funds transfer it was critical to have a network of bank branches where people could go and withdraw money and manage their savings.

This was the key rationale for allowing private banks to have a role in our monetary system. They were given a privilege and in return they provided a branch system, deposit/saving accounts and a payments system.

Most people now rarely enter a bank branch. If they do they are likely to also have saving accounts with purely online banks that have no branches at all – for example – IngDirect, UBank, RaboDirect.

We certainly still need a saving/deposit account system and an electronic payments system but we don’t need “banks” to operate it. We need companies that specialise in providing those services and ONLY those services.

What is the bankers “privilege”?

So what is the bankers privilege?

What is it that we gave them and should now be withdraw?

In very simple terms it is that we treat an IOU (promise to pay) issued by a banker as though it was issued by the public. In effect this means that the private banks have a license (or franchise) to create something equivalent to public money.

No other company or individual has this privilege.

Needless to say if anyone today was to propose treating the promises to pay, of someone other than the government, as though they were money issued by the government they would be laughed out of the room.

Why would we do that when the government is perfectly capable of creating as much money as we could possibly need?

It is in effect a privatisation of the public power over public money.

Clearly this privilege to ‘create’ something that is effectively public money is a very powerful privilege and that is why we have APRA, ASIC and the RBA watching the private banks closely and require the banks meet capital adequacy rules and ‘stress tests’.

But regulating private organisations with this power is not easy.

The privilege, and the central role in the monetary system it gives the banks, makes it very easy for them to make very fat profits which they can then use to:

Offer jobs and well paid seats on boards to retired politicians. This helps to encourage politicians to ‘be nice’ to banks while they are still running the country.

Offer jobs and well paid seats on boards to retired regulators. This helps ensure that regulators still working as regulators think about their possible ‘career options’ when they retire from public service.

Pay armies of spin doctors and public relation people to promote their interests

Run expensive TV campaigns to create the impression that they are a fundamental part of the Australian cultural landscape

Sponsor lots of “feel good” things like spot and community organisations to build support

Pay for expensive ads in major newspapers that exert a subtle pressure on editors when considering how to “cover” bank industry issues.

Launch massive fear campaigns in newspapers when anyone suggests an Inquiry into the role of private banks in the Australian monetary system

You can buy a lot of propaganda and influence when you have been given a franchise to effectively create public money and operate the core machinery of the financial system.

ROYAL COMMISSION – DRAFT TERMS OF REFERENCE

It is no surprise that the Draft Terms of Reference issued by the reluctant Malcolm Turnbull and Scott Morrison specifically avoid any investigation of the role of the private banks in the Australian monetary system.

“..5. The Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight…

Macro-prudential policy and regulation means policy and regulation, including as to the structure, role and purpose of financial regulators, that is concerned with containing systemic risk, which can have widespread implications for the financial system as a whole, beyond simply the banking system. “

They don’t want a proper inquiry into the role of the private banks.

They just want some window dressing inquiry that looks like they have done something. Something that may address a few of the symptoms but does NOTHING to cure the fundamental problem

A PROPER ROYAL COMMISSION

A proper Royal Commission that really looks at the problems with the Australian private banks should focus on the following:

Fundamental Issue

1. What is the current role of private banks in our monetary system.

2. What is the appropriate role, if any, of private banks in our monetary system.

3. What are the reforms that are required to give effect to the appropriate role.

Symptoms of the problem.

The Royal Commission should also spend a considerable amount of time hearing from the victims, giving them a voice and investigating the many symptoms of the current broken and dysfunctional role of private banks in our monetary system including the following:

Financial planning scandals

Life insurance scandals

Sub-prime lending

Low doc lending

Rigging rates

Over charging fees

International money laundering

Control fraud

Asset price pumping

The legislation and regulations concerning the role of APRA

The legislation and regulations concerning the role of the RBA

The legislation and regulations concerning the role of ASIC

The failures, if any, of the regulators to discharge their responsibilities under the legislation and regulations.

The inquiry could be over in 12 months and the report could almost be written right now.

WHAT SHOULD THE ROYAL COMMISSION RECOMMEND?

The recommendations that the Royal Commissioners should make are straight forward:

Recommendation 1

The current role of the private banks in the Australian monetary system is a relic of the 19th and early 20th century and requires immediate reform.

Recommendation 2

The IOUs/credit issued by private banks should lose their privileged status and should be treated no different to the credit issued by any other private organisation or individual.

Recommendation 3

Each private bank will be required to create a deposit/savings subsidiary that will only offer deposit and savings accounts and access to the electronic payments and transfers system.

These subsidiaries will not offer any loans and will be completely independent of the banks that establish them.

Recommendation 4

Having regard to the importance of a low cost, fully guaranteed and secure system of deposit/savings accounts to all Australian citizens the government should give consideration to:

Subsidising some or all of the services offered by the specialist deposit/saving account companies

Encouraging the formation of “not for profit” organisations to enter the market for offering deposit/saving account and payment systems services to the public

Establishing a public organisation or extending the role of an existing public organisation (e.g. Australia Post) to offer deposit/saving account and payment system services to the public.

Recommendation 5

The remaining operations of the private banks will be conducted on the same basis as any other private investment company.

They will be required to raise the funds required for investment from investors and they will make investments on terms that are consistent with the terms on which the investors subscribed to the investment.

They will not be allowed to offer “at call” deposit accounts.

Recommendation 6

Having regard to the importance of investment in projects that expand the productive capacity of the Australian economy the Government should give consideration to making investments via the investment sector to projects that have been investigated and clearly demonstrate a high probability that they will result in an expansion of the productive capacity of the Australian economy.

Recommendation 7

The objectives of economic policy will continue to be low inflation and full employment.

It is time for the dawn of a new era for the Australian monetary system

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“It should be nothing more than a thorough inquiry into why our banking system is so dysfunctional, bloated, greedy, powerful, sneaky, dodgy and incompetent and why the period of deregulation of Australian banking since the 1980s has produced record levels of household debt and an economy that is now hooked on using foreign debt and liabilities to speculate on the prices of houses and land rather than investing in productive industries.”

The first part of this is surely in the eye of the beholder. The banks are working quite well, in fact never better, in and of themselves by any metric you care to use.

The second part of this is simply explained by “because people asked for it”. It was in everyone’s best interests, including the banks’, to keep the debt-binge going.

Maintaining the debt binge was definitely in the interests of certain people but “everyone”?

The issue is not whether a debt binge is popular, as a lifestyle built on borrowing that appears to not require repayment will always be an easy ‘sell’ and attract votes especially when politicians and economic commentators simply ignore the consequences.

When there appears to be no downside people will vote for the “all upside” option.

The issue is whether an alternate approach from the mid 1990s might have produced a more healthy and sustainable model of economic activity and how do we now change direction.